Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It

Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It

Synopsis

Prodded by economists in the 1970s, corporate directors began adding stock options and bonuses to the already-generous salaries of CEOs with hopes of boosting their companies' fortunes. Guided by largely unproven assumptions, this trend continues today. So what are companies getting in return for all the extra money? Not much, according to the empirical data.

In Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It, Michael Dorff explores the consequences of this development. He shows how performance pay has not demonstrably improved corporate performance and offers studies showing that performance pay cannot improve performance on the kind of tasks companies ask of their CEOs. Moreover, CEOs of large established companies do not typically have much impact on their companies' results. In this eye-opening exposé, Dorff argues that companies should give up on the decades-long experiment to mold compensation into a corporate governance tool and maps out a rationale for returning to the era of guaranteed salaries.

Excerpt

The year 2008 was a tough one for most public corporations. the stock market collapsed, diving 38 percent. the broader economy sank into the deepest and longest recession since the Great Depression. the financial markets froze, blocking companies from their usual ability to borrow when in trouble.

Even against this depressing backdrop, some companies’ suffering stood out. American International Group (AIG) endured cataclysmic losses in 2008, over $13 billion in just the first six months. Annual losses grew to a staggering $99 billion by year’s end. From a high of over $70.00 per share, AIG’s stock price fell to $1.25 per share in September, a drop of over 98 percent. To keep aig afloat, the federal government ultimately loaned the company over $180 billion.

Few companies have imploded as dramatically as aig. But other companies’ shares also dropped much further than the market as a whole. the stock price of Abercrombie and Fitch sank 71 percent, for example, and the oil and gas company Nabors Industries saw its share price cut in half.

When a company performs as dismally as these three did, we expect the board to fire the ceo. We might also envision (even a little gleefully) that the CEO’s assets would be confiscated in lawsuits by angry shareholders. Images of brave captains going down with their ships spring to mind. After all, these CEOs led their companies into disaster, causing mayhem for employees, customers, suppliers, the economy . . .